The basics of commodity trading

For all those of you who want to start investing in commodities, here are some basic steps to be followed.

The first step towards commodity trade is the selection of broker. Traditional brokers offer an offline platform where a dealer puts through the trades. These brokers also provide support through research tips. On the other hand, the discount or online brokers will offer you an online trade platform for relatively lower brokerage. However, you will not have an advisor to help you trade or provide research reports. Traditional brokers like Sharekhan, Kotak Securities and Geofin Comtrade charge brokerage between 0.01 and 0.03 per cent on contract value or turnover for trading in commodity futures. With discount brokers like Zerodha and RKSV, the brokerage is only lower of ₹20 or 0.01 per cent per trade irrespective of the contract value. But, do your homework to check on the broker’s reputation before you sign up.

Choose smart

Once you decide on your broker, you will have to open a commodity demat account, for which you will have to provide PAN, bank account details, and address proof as a part of the KYC norms. Make a careful study to choose the commodity you wish to trade. First, to trade on any commodity contract, you need to pay upfront the initial margin of 5-10 per cent (minimum) of the contract value. The contract value is the lot size multiplied by the market price. So, commodities that are traded in large lots will have a higher contract value, and thus a higher margin requirement. A beginner should thus choose small contracts. For instance, one lot of gold guinea, which is 8 grams, costs ₹22,275 currently. The initial margin on this contract is only 4 per cent - which is ₹961. Similarly, there are small lots in silver, copper and aluminium, which you can consider. In addition to initial margin, clients will also be required to pay for MTM margin to offset the loss, if any, in the contract at the end of each trading day. It is calculated by marking all positions in the futures contract to the settlement price at the end of the day. The exchanges may also charge other margins. If volatility in a contract increases, the exchanges will recalculate the margins and collect the additional money in T (trading day)+1 day.